Monthly Archives: May 2012

Often, the prospect of writing a will brings up feelings of discomfort. And yet, devising a will is one of the most important factors in estate planning, one that should promote feelings of security. Doing so means that heirs will be provided for and your distribution wishes will be met. Like many people, have you postponed the task of writing a will? Or, is it time to review a will drafted years ago? A will is a formal, legal document instructing your survivors in the settlement of your estate. A qualified, experienced, legal professional can help ensure your will is properly written and contributes to the overall success of your estate plan.

Composing a will helps to ensure that you control how your estate is divided. An estate that is not covered by a will (also known as an intestate estate) will bring into effect your state’s intestacy rules. These rules govern how your estate will be divided and by whom. Some people may believe their estate is too minor to need a will, but even if you believe this is the case, you should consider writing one anyway. The reason is simple: If you die without a will, you automatically forfeit the chance to direct the dealings of your estate. In addition to facilitating bequests, a will is an opportunity for you to designate your own executor, guardians for minor children, and other fiduciaries.

If you have decided that you would like your estate to pass to personal friends or charity, a will is the primary means of fulfilling these wishes. Without a will, the courts will have no way of knowing your preferences and will seek relatives—however distant—for distribution purposes. For those who have life partners and are not married, wills are a means of helping to ensure that these loved ones will be included. In addition, a will offers the opportunity to designate a secondary beneficiary in the event of the primary beneficiary’s death.

Even those who have shifted the majority of their assets into trusts or who use joint ownership should draw up a will. While these methods are designed to bypass probate (the judicial process that establishes the validity of a will), they are not able to cover all assets. A will, however, does have the potential to cover all assets, leaving no property unaccounted for and no stone unturned.

Wills are a means of providing security to you and your loved ones. The topic may be emotionally challenging, but when the many advantages are considered, they far outweigh temporary discomfort. Careful estate planning is the best way to identify how your assets will be divided, who is to be named executor, and who will receive benefits according to your wishes. Consult a legal professional for specific guidance.

When thinking about sources of funding for your children’s college education, you may assume your family earns too much to qualify for federal grants, loans, and work-study assistance. In fact, even families with higher incomes are frequently eligible to receive some form of financial aid from the government.

The U.S. Department of Education uses a formula for calculating financial aid eligibility that takes into account a range of factors in addition to income and assets, including family size and other financial obligations. When assessing a family’s ability to pay for college, the federal government treats only a small percentage of parents’ assets as potential contributions, while certain types of assets, including home equity and savings in IRAs and 401(k) plans, do not figure at all in the qualification formula.

Filing FAFSA

Even if you expect to cover your child’s college costs through sources other than federal aid, it is usually worthwhile to complete the Free Application for Federal Student Aid (FAFSA). In addition to determining your family’s eligibility for federal assistance, the FAFSA is the primary qualifying form used by many college, state, local, and private financial assistance programs.

The first step in applying for financial aid is filling out the FAFSA, which is distributed and processed by Federal Student Aid, an office of the Department of Education. Hard copies of the FAFSA are often available at high school guidance offices, libraries, or post offices, or by calling the Federal Student Aid office. The simplest way to complete the FAFSA is by going to the office’s website, http://www.fafsa.ed.gov. Filling out the form online will alert you to mistakes or omissions; it can also can speed up the processing time by one to two weeks.

Assuming you are a parent requesting aid for your dependent child’s education, the documents you will need to complete the FAFSA include your federal income tax return and W-2 forms from the previous year, current bank statements, records of untaxed income such as Social Security or veterans benefits, current business and investment mortgage information, and investment records. If you are divorced and are the child’s custodial parent, only information about your own household’s income and assets, including any child support and alimony, are required by the FAFSA. While some colleges take into account the financial resources of the non-custodial parent in determining the student’s need, the federal government does not.

The Student Aid Report

When filling out the FAFSA, you may request that your financial information be sent to up to six colleges. If your child intends to start college in the fall, it is usually advisable to file the FAFSA as soon as possible after January 1 of that year, as deadlines for submitting FAFSA information may be early in the year for some colleges and state awards programs.

Within a few days to a month after it is filed, you should receive by post or e-mail a form known as the Student Aid Report (SAR). On the SAR, you will find the Expected Family Contribution (EFC), an estimate of the amount your family should be able to contribute toward the student’s college expenses for the year. The colleges you listed on the FAFSA will use this figure as a basis for determining the size and composition of any financial aid awards.

If need is demonstrated, the schools that admit your child as a student will prepare a financial aid package covering all or part of the difference between your family’s EFC and the cost of attending the college. Depending upon your family’s income and the resources of the institution, some colleges will offer more or less aid than the gap between the EFC and the actual cost of attending.

The type of federal aid your child receives is largely based on family income. Lower-income students may be awarded grants that do not need to be repaid, such as the Pell Grant or the Federal Supplemental Educational Opportunity Grant (FSEOG), and assistance may be available in the form of a federal work-study job.

Beyond these awards, students may be eligible for subsidized federal loans, such as the Perkins Loan or the Stafford Loan. These loans must be repaid by the student, but the government pays the interest while the student is in school and during grace and deferment periods.

In addition, your family may be offered an unsubsidized Stafford Loan, which must be repaid by the student, or a PLUS Loan, which is in the name of the parents. Interest accrues on these unsubsidized loans from the time the funds are disbursed, though payments may be deferred until after graduation.

When loans offered by federal programs prove insufficient to cover the actual costs of your student’s education, you can apply for a private education loan. These loans tend to have higher interest rates than government loans, but they are often less expensive than other debt sources.

There wasn’t much to ‘Like’ in the financial markets last week as stocks took a hit on another round of global worries. High on the list of concerns were:

· Continuing anxiety over Greece’s ability to avoid default and remain in the euro.

· Rising borrowing costs for Italy and Spain.

· Ongoing fears of an economic slowdown in China.

· Loss of faith in the banking system due to JPMorgan’s $2 billion (and growing) bad bet.

· A very tepid response to the highly anticipated stock market debut of Facebook.

Source: CNNMoney

Investors are particularly frustrated that the European debt situation keeps popping up like dandelions. After two years and 17 euro zone summits, the issue is still not resolved. In fact, it might be worse than ever as Europe is quickly running out of road to kick the can down, according to BusinessWeek.

Greece is at the epicenter of this worldwide concern despite the fact that its population is less than the state of Ohio. Like the subprime crisis before it, investors are concerned that Greece may be the falling domino that kicks off a series of undesirable effects. If Greece has a disorderly collapse, it could spread to other weak European countries and then ripple out to the rest of the world.

Unfortunately, the time for easy solutions has long passed. Central banks and governments around the world have already added trillions of dollars to their balance sheets so they don’t have much room to maneuver. And, here in the U.S., we have a potentially bruising election and looming tax and fiscal matters to deal with by the end of the year.

When you add it up, 2012 is on track to be another dramatic year in world affairs.

Data as of 5/18/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-4.3%

3.0%

-2.9%

12.5%

-3.2%

1.7%

DJ Global ex US (Foreign Stocks)

-6.1

-2.8

-20.5

5.0

-7.4

3.7

10-year Treasury Note (Yield Only)

1.7

N/A

3.2

3.2

4.8

5.2

Gold (per ounce)

0.4

1.0

6.2

20.0

19.3

17.7

DJ-UBS Commodity Index

0.9

-3.3

-16.5

4.3

-4.7

3.2

DJ Equity All REIT TR Index

-6.7

6.0

2.7

27.7

0.2

9.9

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WOULD YOU GIVE YOUR MONEY TO THE U.S. GOVERNMENT for 10 years and lock in a negative yield? Well, that’s exactly what happened last week as investors handed over $13 billion to the government and, in return, received 10-year Treasury Inflation Protected Securities (TIPS). These securities were sold at a record low negative yield of 0.39 percent, according to The Wall Street Journal.

TIPS are a bit different from traditional government securities because, “The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater,” according to the Treasury Department.

Now, why would anybody buy a TIPS with a negative yield when they could buy a traditional 10-year government security with a yield of about 1.7 percent last week? The answer lies in the difference between the two yields.

As reported by Bloomberg, the yield difference between a 10-year TIPS and a comparable 10-year Treasury security was 2.04 percentage points on May 17. Analysts call this the “break even inflation rate.” It means investors were expecting inflation to average 2.04 percent over the next 10 years. When you add the 2.04 percent expected inflation rate to the negative 0.39 percent yield of a TIPS, you get close to the yield of a traditional 10-year government security.

From an investment standpoint, if inflation averages more than 2.04 percent over the next 10 years, then owning TIPS might be a better deal than owning the traditional 10-year government security. Likewise, if inflation averages less than 2.04 percent over the next 10 years, then owning the traditional 10-year security might be better, according to The Vanguard Group.

With its built-in inflation protection component, TIPS are traditionally viewed as a hedge against inflation rather than a play on interest income.

As an advisor, it’s important for us to know the break even inflation rate that is embedded in TIPS. Knowing the market’s best estimate of inflation provides data we can use to help us value and analyze other investments that may be affected by changes in investors’ inflation expectations.

Weekly Focus – Did You Know…

There is only one word in the English language with all five vowels in reverse order. Try to guess what it is before reading below for the answer.

P.S. Please feel free to forward this commentary to family, friends, or colleagues.

Securities offered through LPL Financial, Member FINRA/SIPC.

* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

**Treasury Inflation-Protected Securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates.

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